Wall Street firms added to Enron suit

Nine investment banks named as class-action defendants

By

MattAndrejczak

LisaSanders

NEW YORK (CBS.MW) -- Nine of Wall Street's top-tier brokerage houses helped Enron hide debt, set up off-the-books investment partnerships, and facilitate phony loans, according to lawyers suing the failed energy giant on behalf of shareholders and former employees.

The 485-page amended class-action lawsuit to be filed Monday alleges that the investment banks played a dual role -- described as a "hall of mirrors inside a house of cards" -- in Enron's elaborate scheme to pump up profits And a number of top bank executives personally enriched themselves from the self-dealing, the suit claims.

Although the suit alleges that Enron and its outside banks and law firms lost $25 billion for shareholders, the lead attorney on the case said the loss is closer to $70 billion to $80 billion.

"There's a limit to what can be recovered in damages," said Bill Lerach, senior partner at Milberg, Weiss, Bershad, Hynes & Lerach, on Monday during a conference call with the media.

"Instead of protecting the public from the Enron fraud, the bankers knowingly chose to become partners in deceit," said Lerach. "They were not only willingly participants but profiteers."

In the call, Lerach derided the firms, saying they made billions working for Enron while helping the one-time merchant energy giant come up with "sham" deals.

Before the company's demise, J.P. Morgan helped Enron hide $5 billion to $6 billion worth of loans as the slumping company struggled to remain a picture of fiscal health to investors, according to Lerach.

At the same time, the investment bank pumped up the interest rate on the loans by about 300 basis points above the norm, Lerach claimed.

The suit alleges that J.P. Morgan helped Enron
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make loans appear as profits -- instead of debt -- by entering into the sales of natural-gas and oil contracts with the energy trader.

The transactions kept $3.9 billion of debt off Enron's books, according to the complaint, with the deals made through an offshore entity controlled by J.P. Morgan known as Mahonia Ltd., located in the Channel Islands off England.

Much of the banks' actions appear to be "business as usual on Wall Street," Lerach said. While investment bankers were helping Enron conceal fraudulent financial dealings, their analysts were issuing upbeat stock recommendations to the general public.

He also cautioned that the banks serving on Enron's Chapter 11 bankruptcy committee are more than likely to structure payments to favor their firms. "Banks will come out way ahead," Lerach predicted.

Vinson & Elkins and Kirkland & Ellis, Enron's outside legal counsel, were also added to the suit as was Andersen's ex-chief executive, Joseph Berardino, along with many other members of senior management at the Big 5 firm. See story about Andersen layoffs. Andersen, which has seen more than 100 prominent clients flee, began cutting employees Monday and will continue to do so until the job-cut count reaches 7,000.

The law firms are accused of issuing false legal opinions, orchestrating illicit financial arrangements for the partnerships and helping to prepare false submissions to the Securities and Exchange Commission.

The Wall Street brokerage houses and law firms were added to the list of defendants that already included 29 current and former Enron executives and Andersen.

"There's been an expectation that lawsuits concerning Enron would spread and attempt to involve any of the banks that had done any of the structuring for the company," said Diane Glossman, an analyst with UBS Warburg, who covers the financial sector. "This announcement is no surprise."

Glossman expects the litigation to continue for a while, with headlines accompanying it, she said.

"I think we'll be hearing a lot about this even if there is only smoke and no fire," she said.

J.P. Morgan declined to comment, while Citigroup could not be immediately reached for comment.

Merrill Lynch said there is no basis for the claim, adding: "We intend to vigorously defend against it."

On Friday, CSFB confirmed that two of its investment bankers sat on the board of an Enron-related off-balance-sheet company they helped create.

"Two CSFB bankers served on the board of Atlantic Water Trust for a short period of time at the client's request," said CSFB spokeswoman Jeanmarie McFadden. "This fact was fully disclosed to investors in the 2001 Marlin offering circular, in addition to documents filed publicly with the SEC."

McFadden said the two bankers, Laurence Nath and Dominic Capolongo, are still employed with the firm.

On Monday, Lerach did not rule the addition of more names to the amended complaint, saying that the suit "broadens the scope for potential liability." He expects the suit to proceed apace, and also predicted that the discovery process would begin soon.

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